Thoughts on the economic and technological implications of people working online.

Thursday, February 16, 2012

Why aren't we all freelancers?

Investors typically hold diverse portfolios of assets, with the goal of reducing risk. While diversification is commonplace in investing, most of us have no diversification in our labor income streams: we work at one job at a time, for a single employer. However, the "returns" to a job vary like returns on investments, especially on non-financial dimensions (e.g., engagement, learning, co-workers, working conditions). As in investing, there is also a significant amount of direct financial risk in holding one job---the firm may impose layoffs or go out of business. Given the similarities between jobs and assets, why isn't there a similar impetus to diversify, i.e., why don't we all hold a portfolio of small jobs at the same time, with many different employers [0]?

Some workers---freelancers and independent consultants---do follow this diversified model, but it's hardly the norm of workers generally. Below, I lay out a laundry list of potential economic explanations for why the portfolio/freelancing approach is not more common. What's interesting to me both academically and as someone working at oDesk is that many of these points are not set-in-stone attributes of the productive process but are instead things that smart features or policies might change.

Non-linearity in costs of searching/vetting/bargaining
Hiring a freelancer for a small project is like picking out a fancy restaurant; hiring a full time employee is more like buying a house. The effort of searching and vetting (and thus the cost) is related to the stakes of the hire. However, there is no guarantee that those costs scale linearly with the stakes. Suppose it takes nearly as much effort to find a small job as it does to find a large job---then a portfolio approach will generate larger search costs per dollar earned in wages [1].

Non-linearity in job size and productivity
If you can make X widgets or Y schwidgets in 1 hour, it doesn't mean you can make X/2 widgets and Y/2 schwidgets in 1 hour. Every job has some fixed set-up costs---getting out the materials, remembering the key details, etc. The larger the costs, the less attractive the small job. On the other hand, productivity eventually wanes from boredom, physical fatigue, etc. ("I'm really getting bored with this TPS report---time for some Facebook"). The optimal size job (from a productivity standpoint) might be near or above the current 40 hours per week, 50 weeks a year paradigm, in which case going smaller means getting less efficient.

Complementarities with team members that grow over time
One of the advantages of team production is that workers can share knowledge with each other, motivate each other and generally create an environment where everyone is more productive than they would be working alone. There's no reason teams of freelancers working together cannot achieve the same complementarities with each other, but if these complementarities take time to develop, larger jobs become more attractive.

Firm-specific human capital

If a job requires lots of firm-specific human capital, the per-job learning requirement is high, which tends to encourage larger jobs [2].

Monitoring & policing costs
Once you get a sense of the character and reputation of some trading partner, you don't need to constantly monitor that person/firm. After some level of trust has been established, these costs would fall. This again pushes for larger jobs. This is probably clearer in terms of firms monitoring workers, since the big fear is shirking, but it does go both ways: workers need to make sure their checks don't bounce, that their employers aren't skimming from the 401K, using malk for the coffee service instead of milk, etc.

Employer concerns about IP (broadly defined)
I do not think it is likely to find workers working simultaneously for direct competitors [3], the interests of most firms are fairly orthogonal to each other.

Existing public policy
At least in the US, at the present time, certain realities (health insurance, getting financial credit etc.) are full-time employee advantaged.

[0] Note that this isn't a theory of the firm argument or discussion. I'm assuming that one can be a full employee and reap all the benefits of firm organization / team production even with fractional employment.

[1] One of the reasons mechanical turk is semi-dysfunctional is that when problems arise (about the scope of work, payment terms etc.), all the surplus generated by the relationship is quickly destroyed: one minute thinking, talking and haggling about a task paying pennies is likely to be economically wasteful. This was one motivation for hagglebot.

[2] I think this is why ideal use of online labor is not so much a 1 for 1 replacement of some traditional job, but a decomposition of jobs into easily outsource-able pieces and pieces that require deep firm-specific knowledge.

1 comment:

The general tradeoff is that at a regular job, you're going to be paid less per hour than a specialist, but your employment is more stable and you get the privatized socialism that's much better than the public socialism we have in the US.

Employers like it because the workers don't leave. All the specialized skills and knowledge that are not worth so much elsewhere are valuable at the company. Early on, it costs more to hire someone full time, but after a while, it saves money.

Automating a process in-house is going to use an abbreviated planning and communication process that, when working with a freelancer or outsider, would totally fail. The insider knows the users and what the business needs are in a few short meetings. You're going to save tens of hours just in meetings. And if the project touches more than a handful of people, you can save hundreds of person-hours with in-house talent.

These things are also the key to successful freelancing: to get repeat business because you know the client's needs and capabilities.